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The JetBlue Way

The JetBlue Way

JetBlue’s woes since last Wednesday’s ice storm raise a compelling question: just what do people expect for $99? Since its founding eight years ago, JetBlue—with one-way fares often that inexpensive or less—has been an extreme example of our strange bargain with the airlines. Airfares are cheap enough that most working families can afford a nice warm-weather vacation every winter or two. But in return, customers assume the risk that they’ll face conditions bordering on human-rights violations, as one JetBlue customer stranded for hours on an airplane at JFK described his plight last week. That risk is a very real, if invisible, part of the “cost” of the low fare.

In fact, airline conditions on any carrier these days are barely tolerable even on a good day. Seats are cramped; delays are routine; announcements about the length and reasons for those delays are obscure. When an airline loses your luggage, it doesn’t actually have to pay you the full value of what it lost.

And on a bad day, things are utterly miserable, as JetBlue’s problems last week proved. The airline grossly miscalculated weather conditions Wednesday, leaving planes stranded on the tarmac for up to nine hours. Then it canceled flights for six days straight as it struggled to correct the cascading effects of its initial mistake. And while this debacle was an extreme case, it follows other similarly disastrous examples in the past few years at two competitor airlines.

JetBlue founder and CEO David Neeleman candidly admitted the reason for the airline’s troubles on Sunday, noting that the company hasn’t invested enough in its communications systems over the years to keep up with its rapid growth. Why? Likely because it wanted to keep its fares low, of course.

In fact, the entire industry’s laserlike focus on low fares is a big reason why airline profits are often razor-thin in a good year, and, over the long haul, nonexistent. And JetBlue’s particularly low fares force competitors—who’ve usually been around a lot longer and thus have to pay for things like pensions that JetBlue doesn’t have to worry about yet—to push their fares down, too. The older airlines solve this problem by declaring bankruptcy once in a while, pushing costs onto three groups: workers, who get lower-than-agreed pensions; the federal government, since the government must make up for some of the pension shortfall; and shareholders, who lose the value of their stock.

Neeleman promises that JetBlue will regroup from last week’s chaos by designing new rules to compensate future stranded customers. Further, the company probably will reimburse last week’s beleaguered travelers at a much greater rate than the government requires, which might help counter some of the bad press the company has earned. Naturally, Neeleman also said JetBlue will invest in its communications system to avoid future disarray.

But all of those costs should result in higher fares at JetBlue, creating an excellent opportunity for the next JetBlue: an upstart airline that comes out of nowhere and offers crazily low fares, which it can do only because it has no legacy costs and chooses to underinvest in its vital infrastructure. Given a choice, if history is any guide, customers will vote their short-term interest, taking the lower fare and leaving theoretical problems to the future.

So isn’t this a perfect opportunity for more government regulation? Some members of Congress are already bandying about an early version of an “airline passengers’ bill of rights” that would mandate a maximum number of hours that planes full of passengers could sit on a tarmac, for example.

But the airline lobbyists likely would have lots of input into any such bill, so it probably would amount to a bunch of tough-sounding regulations that really don’t help customers. Conversely, if the bill really was tough, it would carry a cost—that is, it would bring, yes, higher fares, and thus make flying, and cheap vacations, inaccessible to some working people.

In the end, passengers seem to have declared, through their purchasing behavior, that they like things just the way they are. In effect, when you’re buying an airline ticket, you’re also “selling” the airline a valuable, but hidden, option (the type of risky, short-term derivative instrument traded at investment banks). That instrument grants the airline the right, arbitrarily, to lose your luggage or steal your time from you, if conditions warrant. Your ticket is cheaper because you, not the airline, bear this risk; you “sell” the risk to the airline bundled invisibly in your unbelievably low fare.

Since passengers bear this risk, the reality is that someone, somewhere, sometime will get the shaft—as thousands of JetBlue customers did last week. So you buy your cheap ticket, and just hope it’s not you stuck on the tarmac this time around.